Sm and Sm-like proteins are RNA-binding factors found in all three domains of life. Eukaryotic Sm proteins play essential roles in pre-mRNA splicing, forming the cores of spliceosomal small nuclear ribonucleoproteins (snRNPs). Recently, Sm proteins have been implicated in the specification of germ cells. However, a mechanistic understanding of their involvement in germline specification is lacking and a germline-specific RNA target has not been identified. We demonstrate that Drosophila SmB and SmD3 are specific components of the oskar messenger ribonucleoprotein (mRNP), proper localization of which is required for establishing germline fate and embryonic patterning. Importantly, oskar mRNA is delocalized in females harboring a hypomorphic mutation in SmD3, and embryos from mutant mothers are defective in germline specification. We conclude that Sm proteins function to establish the germline in Drosophila, at least in part by mediating oskar mRNA localization.